As the online grocery delivery market grows, thanks in large part to Amazon, so does the need for cold storage space in the U.S.
Nearly half of U.S. consumers are already shopping for packaged food products online. This is expected to rise to 70% by 2022, translating into an estimated $100 billion spent per year on online groceries, as stated by the Food Marketing Institute and Nielsen.
According to a June 2019 report from Edge by Ascential, Amazon sold $8.2 billion worth of groceries online in 2018, growing 12.5% year over year. Its closest competitor was Walmart at $2.84 billion.
A large portion of future purchases will likely be perishable food items requiring more freezer/cooler space of storage and distribution.
USDA estimates there is 3.6 billion-cu. ft. of industrial food commodity cold storage space in the U.S. Limited new construction is due to the relatively small number of operators and the specialized nature of the industry, according to CBRE’s 2019 U.S. Food on Demand Series: Cold Storage Logistics Unpacked report.
CBRE estimates cold storage space demand of between 70 million- and 100 million-sq. ft. over the next five years.
As grocery stores become smarter and develop quicker and easier ways to get food to consumers, online shopping is expected to become a much greater portion of retail sales, influencing refrigerated warehouse sales and demand.
Drivers of Cold Storage
In particular, online grocery shopping is gaining traction for younger consumers. In 2018, the number of 18- to 29-year-olds who actively shop for groceries online increased by three percentage points, according to a study by Brick Meets Click.
Although not big users of online grocery shopping today, Baby Boomers will likely begin to use it more as the technology and user-experience improves. Furthermore, many in this age cohort tend to migrate to retirement communities in warm weather states such as Florida and, not only will they shop for groceries, but retirees will patronize restaurants and food places—resulting in a greater need for cold storage distribution in and around these regions.
Additionally, in response to consumer preferences for healthy options, many eating places eliminated artificial flavors and preservatives as ingredients. This means that more food items must be stored in and distributed from cold storage facilities.
Ramping up construction to meet the demand online grocer poses on cold storage will be challenging, according to CBRE. Obstacles include construction costs double or triple that of traditional warehouses, longer construction lead times, significantly higher clear heights and the complexity of maintaining multiple temperature zones within the same building.
Cost is one of the reasons there is very limited refrigerated warehouse development as costs per square foot for a temperature-controlled facility can be as much as triple the cost of constructing a traditional warehouse.
In regards to time, the time frame to build a cold storage warehouse is usually four to five months longer due to higher complexity and building standards. Construction costs also tend to increase with lower temperature requirements and higher ceiling heights that increase the number of pallet positions.
CBRE estimates the cold storage vacancy rate is at around 4.3% and in some markets where cold storage demand is at an all-time high, the rate is much lower. Cold storage occupiers rarely vacate their space unless they are scaling back business or moving to a new facility.
As demand grows and more investors target cold storage, CBRE predicts an increase in projects without a tenant in place—meaning there will be more entrants into this space, with specialized developers and contractors leading the way.
The firm also predicts that, although major metro areas will capture much of the demand for cold storage development, rising land and construction costs will push activity toward smaller markets adjacent to ports, intermodal hubs, and large population centers.
More high-tech implementation in cold storage facilities can be expected as well, despite the fact that robotics technology has not fully infiltrated these spaces like it has in traditional warehousing. Large retailers already implementing automated systems will be driving this trend.
In the meantime, major food retailers are making moves into e-commerce by partnering with delivery platforms. For example, Kroger partnered with British online grocer Ocado. The companies are building out a high-tech cold storage distribution system, initially identifying sites for at least 20 cold storage warehouses across the U.S.